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improvement forecast for retail market

Resurgent Economy Bodes Well For Valley Retail Market

As the economic recovery gains steam, the Phoenix retail market will continue to strengthen this year, according to a market forecast from Marcus & Millichap. Over the past 12 months, the metro has been one of the top-performing job markets in the country. Additionally, after years of setbacks, the housing market recorded six consecutive months of price increases through March.

As these trends unfold, retailers that shuttered during the housing crisis will be encouraged to expand in densely populated areas of the metro. Most of the submarkets will post positive absorption this year as new supply remains limited and national tenants, including Sprouts, Hobby Lobby, and Dollar General, capitalize on the available space and low rents. However, store closures by Borders, Circuit City and, more recently, Best Buy has left more than 8.5 million square feet of empty big-box space on the market. Operators sitting on large blocks of space in established areas will have to offer lucrative concessions to backfill the space, while properties in less-desirable neighborhoods will struggle to attract tenants. In the East Valley, a few owners will reconfigure layouts and offer smaller footprints to broaden their potential tenant roster, while others may redevelop the property into another commercial use.

As CMBS loans mature, more distressed properties will hit the market this year, attracting private investors seeking steep discounts. A bulk of the multi-tenant deals that traded in the last year involved bank-owned strip centers, a trend that will continue for the remainder of 2012 as banks foreclose on over-leveraged owners. In hard-hit areas of Mesa, Chandler, and Gilbert, where population growth did not meet prior expectations, buyers will be able to purchase highly vacant strip centers for below $60 per square foot. Well-capitalized local and California investors who waited on the sidelines will pay cash for troubled assets. The owner will renovate the property and adapt the use toward the changing demographics in the area. The new configuration, along with favorable leasing terms, will help the operator backfill the space over several quarters. After holding the asset for three to five years, the owner may list the stabilized strip center at a cap rate around 9 percent, depending on interest rates.

2012 ANNUAL RETAIL FORECAST

Employment: By year end, total employment will expand by 2 percent as companies generate 35,000 new jobs. The increase represents a modest uptick from last year, when employers hired 28,600 workers.

Construction: In 2012, projects totaling 600,000 square feet of retail space will be completed in Phoenix, expanding supply levels by 0.4 percent. In the previous year, construction output fell to the lowest level on record as builders delivered a mere 391,000 square feet.

Vacancy: As the economic recovery gains traction this year, retailers will continue to expand in the metro. Vacancy will finish 2012 at 11.2 percent, marking a 70-basis point improvement from a year earlier as tenants occupy 1.5 million square feet. In 2011, vacancy fell 30 basis points.

Rents: Asking rents will show a 0.5 percent increase this year to $18.18 per square foot, while effective rents will rise 0.6 percent to $15.26 per square foot. In 2011, owners trimmed asking rents 0.6 percent as effective rents retreated 0.5 percent.

For more information on the retail market forecast by Marcus & Millichap, visit Marcus & Millichap’s website at marcusmillichap.com.